Question

The accounting records of Wall’s China Shop reflected the following balances as of January 1, Year 3:

Cash	$	17,700
Beginning inventory		20,680		(220 @ $94)
Common stock		14,700
Retained earnings		23,680

The following five transactions occurred in Year 3:

1. First purchase (cash): 125 units @ $96
2. Second purchase (cash): 195 units @ $104
3. Sales (all cash): 375 units @ $200
4. Paid $16,100 cash for salaries expense
5. Paid cash for income tax at the rate of 25 percent of income before taxes
   

Required
a. Compute the cost of goods sold and ending inventory, assuming (1) FIFO cost flow, (2) LIFO cost flow, and (3) weighted-average cost flow. Compute the income tax expense for each method.
b. Use a vertical model to show the Year 3 income statement, balance sheet, and statement of cash flows under FIFO, LIFO, and weighted average. (Hint: Record the events under an accounting equation before preparing the statements.)

Answer 1

a)

Cost of goods sold
FIFO	Units		Cost per unit		Cost of Goods Sold
Beginning Inventroy	220.00	@	$            94.00	=	$                20,680.00
From First Purchase	125.00	@	$            96.00	=	$                12,000.00
From Second Purchase	30.00	@	$         104.00	=	$                  3,120.00
Total	375.00				$                35,800.00
Ending Inventory
FIFO	Units		Cost per unit		Cost of Goods Sold
From Second Purchase	165	@	$         104.00	=	$                17,160.00

Cost of goods sold
LIFO	Units		Cost per unit		Cost of Goods Sold
From Second Purchase	195.00	@	$         104.00	=	$                20,280.00
From First Purchase	125.00	@	$            96.00	=	$                12,000.00
Beginning Inventory	55.00	@	$            94.00	=	$                  5,170.00
Total	375.00				$                37,450.00
Ending Inventory
LIFO	Units		Cost per unit		Cost of Goods Sold
Beginning Inventory	165.00	@	$            94.00	=	$                15,510.00

Weighted Avg	Units		Cost per unit		Cost of Goods Sold
Beginning Inventroy	220.00	@	$            94.00	=	$                20,680.00
From First Purchase	125.00	@	$            96.00	=	$                12,000.00
From Second Purchase	195.00	@	$         104.00	=	$                20,280.00
Total	540.00	@	$            98.07	=	$                52,960.00
Cost of goods sold	375.00	@	$            98.07	=	$                36,777.78
Ending Inventory	165.00	@	$            98.07	=	$                16,182.22

b)

WALL's CHINA SHOP
Computation of income tax expense and Net Income
	FIFO	LIFO	weigh avg
Sales	$   75,000.00	$    75,000.00	$                75,000.00
cost of goods sold	$ (35,800.00)	$ (37,450.00)	$              (36,777.78)
Gross Margin	$   39,200.00	$    37,550.00	$                38,222.22
Salaries expense	$ (16,100.00)	$ (16,100.00)	$              (16,100.00)
Income before tax	$   23,100.00	$    21,450.00	$                22,122.22
Income tax	$   (5,775.00)	$    (5,362.50)	$                (5,530.56)
Net Income	$   17,325.00	$    16,087.50	$                16,591.67